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Guest Post: Global Grand Policy Failure: Liquidity Traps And Financial Black Holes
Submitted by Charles Hugh Smith from Of Two Minds
Global Grand Policy Failure: Liquidity Traps and Financial Black Holes
"We are all Keynesians now," indeed. Keynesian policies have pushed the global economy into a financial black hole.
What we are experiencing is Grand Policy Failure on a global scale, a failure best understood by examining liquidity traps and the Keynesian plummet into Financial Black Holes.
What is a liquidity trap? Here's Wikipedia's definition:
The liquidity trap, in Keynesian economics, is a situation where monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply. Liquidity traps typically occur when expectations of adverse events make persons with liquid assets unwilling to invest.
Here's what that means in the real world. I have $100 in liquid assets, i.e. cash, I saved from my income. I could leverage that by borrowing $1,000 at low interest and devoting the $100 to service that new debt ( i.e. make a future monthly payment), but since my future income is in doubt, I have no desire to take on more debt, even at zero interest. How do I know if my income will enable me to pay back the principal?
I could spend the $100 on discretionary purchases, but since I have everything I need to get by and my future income is doubtful, I prefer the security of savings over the marginal return of owning more gewgaws.
I could use it to hire an assistant (presuming I'm self-employed or in business), but since revenues have been unpredictable, I'd rather work a few extra hours myself and keep the $100.
I could spend the $100 on some new software that might make me more productive, but why bother when business is at best flatlined and at worst, in a freefall?
That's a liquidity trap: those with cash and the ability to borrow have no desire to either spend or invest in new employees or business assets. Their cash (liquidity) is "trapped" in the sense they have no desire or need to spend it or invest it.
In standard Keynesian economics, the only thing holding back a tide of spending and investing is lack of faith in future growth.
This is of course wrongheaded. Keynesianism is blind to the black hole of debt: at a certain threshold (event horizon), the ability and/or willingness to borrow more vanishes. No amount of monetary easing or shoveling new money into banks can spark new debt and spending.
Keynesianism is also blind to the necessity of debt renunciation/forgiveness: the key to freeing up new spending and investment is not shoveling more liquidity into the system, it's blowing off all the bad/impaired uncollectible debt in the system, wiping out borrowers and lenders alike (recall that one man's debt is another man's asset).
That would mean wiping out the "too big to fail" banks, and for some reason the Keynesian cargo-culters (Krugman, Reich et al.) never once propose the renunciation of impaired debt as part of their "solution."
Keynesians also fail to see the black hole of delegitimization: one reason why nobody wants to spend or invest is the credibility of the nation's financial institutions has vanished into the black hole of lost legitimacy.
Now that institutional credibility has fallen below this critical threshold, it cannot be recovered without deep structural transformation that includes severely limiting the political and financial power of Wall Street and the "too big to fail" banks.
Since that's never on the Keynesian agenda, what we have instead is three failed policies, not just in the U.S. but globally. Finding a Prescription for the U.S.'s Money Trap: Three fixes to the "liquidity trap" (WSJ.com):
One, the classic Keynesian prescription is for the government to borrow (after all, rates are low and savings idle) and spend to create demand and jobs.
Two, Lars Svensson, now deputy governor of the Swedish central bank, sees one "foolproof way of escaping from a liquidity trap"—devalue the currency. "This will jump-start the economy and escape deflation."
Three, the interest rate that matters in the economy is the sticker-price rate adjusted for inflation. So some economists argue that the way out of the trap is for the Fed to convince everyone it's going to create more inflation. If inflation goes up and interest rates don't, then the inflation-adjusted interest rate falls, and that will give people cause to borrow and spend. Incomes rise with inflation, debts wouldn't, and they'd be easier to pay off.
All three Keynesian policies have been tried, and all three have failed completely. The massive "shovel-ready" fiscal stimulus caused a minor blip up in activity, but it did not spark any regeneration of borrowing and spending. All it did was enable further deleveraging as consumers and businesses struggled to pay down their crushing debt loads.
As for devaluing the currency, the Fed's policies devalued the U.S. dollar 32% from the early 2000s, and 17% from 2008. Rather than spark a boom of spending and investment, this massive devaluation sparked a dramatic loss of purchasing power which households experience as high inflation.
No nation ever prospered in the long-term by devaluing its currency. Devaluation is just another Keynesian "quick fix." Borroing 40% of Federal spending didn't "fix" what's wrong with the economy? Then borrow 50%. That devaluation wasn't enough? Then takes the dollar down another 10%. These are the policies of debt-junkies, not legitimate long-term growth based on capital formation and productive investment.
As for inflation being the "solution," the Keynesians forgot that vast, systemic labor surpluses mean that wages and incomes don't rise with inflation, except for the top 10%. So rather than force people to spend, spend, spend, that higher inflation so beloved by Keynesians has sapped the purchasing power of the bottom 90% of households which have seen their incomes stagnate or decline for years.
Solution 1: Central State fiscal stimulus: failure.
Solution 2: central bank-induced currency devaluation: failure.
Solution 3: central bank-induced inflation: failure.
Every textbook Keynesian solution to escape the black hole of liquidity entrapment has been tried on a grand scale, and failed on an even grander scale.
The solution is simple: renounce/write down all impaired debt, wipe out the "too big to fail" banks, and restrict the reach and political power of the remaining banks and Wall Street.
Until we're willing to do that, then the liquidity trap will remain a black hole that the economy cannot possibly escape.
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I'm sorry did i miss them handing everyone in the US a check for $10,000?
martial law is coming, bitchez
http://azizonomics.com/2011/08/09/martial-law-inevitable-not-desirable/
"We ain't got no jobs, no money. We heard that other people were getting things for free, so why not us?" asked E.Nan, a young man in a baseball cap in Hackney, a multi-ethnic area in east London and one of the worst-hit areas.
So I wonder what the governemnt thinks about Twitter revolutions now?
Add Larry Summers to that camp of Keynesian IDIOTS. Old, out of touch, caught in a rut Larry Summers needs to freakin' go away. Can't stand looking at the moron on TV spout about "economic policy" when he lived during a 60 year cycle of illusionary money policy.
Even Reagan had it wrong, but we're just seeing the results now.
Don't stare into the Palantir. You don't know who's in charge of the programming.
dupe
Debtless said: 'I'm sorry did i miss them handing everyone in the US a check for $10,000?'
About 20k per taxpayer would pretty much erase the personal non-collateralized debt, but the boyz have to keep the debt slaves in their place. The majority of people would use the cash to pay down debt, and a few would buy big screen televisions, hookers and coke, so the price for those items would likely rise.
That will simply cause it to go underground, and it will come back far more violent.(this is when the HARD cores get together.)
Until you rationally deal w/the issues,this would take it to the next level.
Let them declare it, and wait till a few are beaten, or killed.
You ain't seen nuthing yet.
About the only way they'll get spending going.
All this while the CIA murders more US Service members so they can justify the WOT. Good luck cutting the Pentagon budget.......
oh, do you mean when they helped their double agent taliban people setup the seal team 6 people, the same ones that participated in that so-called "raid" on "bin laden" which probably didn't happen anything like was told to us, but nevertheless, they had some loose ends running around, some loose ends that needed to be taken care of. such is life in the spook and black ops community. whatever it takes, whoever it is that needs wacking.
loose ends? explain what you mean here, as none of the seals who died in that crash were part of the bin laden raid.
People talk.
that is not what i have read. loose lips sink ships. sometimes witnesses die. does it disturb you that your own military can do this to its own people? hmmm? also please don't bark orders at me sir. i am not in the military anymore and i don't like taking orders from anyone....:)
http://rense.com/general94/execc.htm
http://en.wikipedia.org/wiki/Pat_Tillman
Always brothers in Arms....Always
At least the War on the Middle Class is going well.
sad to admit, but that made me laugh!
Oceania has always been at war with The Middle Class.
Too true.
"So what happened to the stimulus? Much of it consisted of tax cuts, not spending. Most of the rest consisted either of aid to distressed families or aid to hard-pressed state and local governments. This aid may have mitigated the slump, but it wasn’t the kind of job-creation program we could and should have had. This isn’t 20-20 hindsight: some of us warned from the beginning that tax cuts would be ineffective and that the proposed spending was woefully inadequate. And so it proved.
...
So let’s summarize: The economy isn’t fixing itself. Nor are there real obstacles to government action: both the bond vigilantes and structural unemployment exist only in the imaginations of pundits. And if stimulus seems to have failed, it’s because it was never actually tried. "
http://www.nytimes.com/2011/07/11/opinion/11krugman.html?_r=1&partner=rs...
that the proposed spending was woefully inadequate
Spending? No the bulk of the money went right to the banks and corps and there it remains.
Japan says hello.
The Bernank should be in prison for treason!
Ben and Alan should be cell mates.....
that would be the start of some actual justice
the mudhole stomping on silver continues on today. blythe, you are going to get yours one day...........
What happens when something is repressed too long and too hard?
Nothing good. Example: around 60 years ago a bunch of geeks got together and repressed some refined uranium.
tl;dr Keynesian stimulus cannot work when it simultaneously extends deleveraging.
Some call it Keynsianism, others Marxism, but at the end of the day, it's all still a huge heap of shit.
Beliefs. Much like religion. Our civilization is approaching a cognitive ceiling that we cannot get through. Gridlock as it's refered to Rebecca Costas book.
Rather than approaching things differently, it feels better to resort to religion and what temporarily "got us through the challenges of the past" for short term relief. It feels good and buttons complex problems up nicely by resorting to Keynsianim and Marxism explanations and solutions, no differently than throwing virgins into the volcanos or making human sacrfice did to anchient civilization that ran up against it's own unsolvable mysteries.
In order to smash through this barrier, the leaders and benefactors of these old religions must either step aside or be made to step aside so civilization can evolve beyond this religion of debt and ponzi madness.
Watch that greenback strengthen now that interest rates are plunging world wide and defaults start cascading. MARS ATTACKS!
The massive "shovel-ready" fiscal stimulus caused a minor blip up in activity, but it did not spark any regeneration of borrowing and spending.
That was mostly bullshit actually. The money went to big government pet programs and state governments to plug holes and cover existing liabilitiies. So, to be fair to Keynesianism...we don't know what the outcome of real infrastructure stimulus would have been.
Is there a new bridge in your town?
True dat. Near me, they re-surfaced about 9 miles of shoulder along the highway. I shit you not. Some asshole senators brother in law made a killing, I'm sure.
Yeah man, come to Chicago or any other city in IL near Chicago and you won't believe the amount of shovel-ready projects going on right now. They're tearing down and rebuilding every bridge/over-pass whether it needs maintenance or not. Obama knows how to take care of his supporters.
Well I can believe that but in my neck of the woods and most places I've been I see a lot of these:
http://thumbs.dreamstime.com/thumblarge_536/1283813375xt60hM.jpg
...and not much shovelin'
This is an excellent Reader's Digest article on why we are here, today. Clearly states the problem, and proposes a solution. Refreshing. Good stuff to forward on to your local politician.
hedgeless,
If they COULD read, it would work.
IF they gave a shit, it could work.
It's all for one, and one for all....................UP ^ There....................
...local politicians.
Know your sherriff, constable, mayor, etc., on a first name basis. They are wondering what the hell is going on, too. An article like this one may be appreciated.
Plus, the Keynesian multiplier efect, ala Romer, is not working because the national debt is overwhelming any stimulus effect, requireing exponentially greater "stimulus" to get the same results as before. Hence, Krugmans call for more and more.
Each sequential Kenyes stimulus over the decades has acheived less and less actual stimulation of the economy because of the growth of the national debt.
Krugman is a giant effing idiot.
Cramer keeps screaming THIS ISN'T 2008!
Well no shit buddy, in 2k8 all the lies came to a head, and things got ugly fairly quickly, and we were told there would be tanks in the streets if we didn't "save the banks."
This is 2011, and we are now dying of cancer. It is a slow and agonizing process, with some good days and some really bad days, until one day you end up in the ICU hooked up to a mass of machines trying to extend your life for another month or so and you still die anyway.
Cramer is an idiot.
This is not a failure. This is the point. A Keynesian (which I am NOT) would argue that if we enable enough deleveraging, then the crushing debt burden would be releaved, and we would escape the liquidity trap.
For a minute there I read a Kenyan not Keynesian... Thought you were talking about TOTUS
Yep.
"'To dig holes in the ground', paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends."
Leave your review:
http://maps.google.com/maps/place?q=federal+reserve+dc&hl=en&cid=2680511...
Set it on fire before you ring the doorbell too.
Keynesianism is a ringing success.
Successful enabling smokescreen for theft.
Hear, hear!
The next time you are tempted to think of your enemies as idiots -- please stop and remember that this is the surest way to get your ass permanently kicked.
They aren't stupid. They just aren't doing what you assume they are doing.
the only thing needed to make the K work is to have God on their side--but alas god is on the side of the market---tut tut King Tut--let my people go----and so they don't acknowlage the debt owed to the king and court. --the debt and assets (and the zeros) evaporate--- but but its not part of the plan-- oh but it is-- its the market--and Gods on the side of the market.
Monetary stimulus failed long ago, all we became is monetary-meth addicts.
Schumpeter warned us, what gets us out of this pending Kondratiev Winter is technology-stimulus. We could go a long way toward that by withdrawing (our right) from that specious Outer Space Treaty of 1967, and then using national sovereign powers, go back to the Moon for commercial development, recognizing private parties' discoveries, zero-g process-innovations, reformulations of existing materials (superconductors, nano-fabrics, etc). The non-recognition of private property rights is implicit in that damn Treaty....so why the fuck would any party take the risk? You come back to earth and you're in international litigation for the next few decades.
If you don't sit on that property out there then you can't own it--treaties are BS--just ask SpaceX or Bigelow A--
That would be a very productive treaty if it induced all that is stated.
Could not be the case in this US driven world.
Commercial development of the Moon? Made me laugh. It has not happened because it is not profitable. Simple as that. If it were, treaty or not treaty, it would have already happened.
Can anyone comment on silver floundering? What is going on here? Same with platinum. Indicators of the real economy?
The Market is down 25%+..
Everyone is at Jacksonhole!
Let the Printing Begin!!
QE-3 will save Wall Street (again, again and now.. yet again!) FUCK YEAH!! PARTY ON!!!
Insider buying approaches record levels. No report from Zero Edge. Only armaggedon headlines are allowed.
You think we got problems..check out the UK:
http://news.yahoo.com/uk-prime-minister-david-cameron-says-more-robust-1...
And how about Wisconisn....
Child: "Daddy, can we go to the Wisconsin State Fair?"
Father: "Not this year son."
http://ireport.cnn.com/docs/DOC-647754
Yeah, yeah...ACORN provacateurs...clearly working for "the man"...quick, where's that fake pimp with the camera?
Wouldn't it be nice if Wisonconsin had some dedicated public servants to deal with this kind of thing?
Insider buying approaches record levels. No report from Zero Edge. Only armaggedon headlines are allowed.
Yes, yes, yes, we know...buy the fucking dip you fucking idiot.
QE3 pre-positioning has been discussed here ad nauseum.
How much BAC did you buy last month, Mr. Insider? A little early, weren't you?
CNBS newsflash:
the fear in the market is over, everyone back in the pool
BREAKING
Don't know how/where else to post this in RT as quickly as possible:
Here in the Netherlands all trading of "hefboomprodukten" (defined risk hedging products) has been suspended from 1600 hours (now). We got 5 minutes warning. These products are defined risk and deal in all categories: stock, rates, soft/hard commodities, indexes, everything.
This is the press statement, in Dutch:
NYSE/Euronext heeft aangegeven dat de de handel in Turbo's, Sprinters en Speeders mogelijk geheel of gedeeltelijk vanaf 16:00 uur wordt stilgelegd.
Wij houden u via deze belangrijke mededeling op de hoogte van de status.
Hefboomprodukten
That is what a Dutch playboy model said when Hugh Hefner.....
BREAKING
Don't know how/where else to post this in RT as quickly as possible:
Here in the Netherlands all trading of "hefboomprodukten" (defined risk hedging products) has been suspended from 1600 hours (now). We got 5 minutes warning. These products are defined risk and deal in all categories: stock, rates, soft/hard commodities, indexes, everything.
This is the press statement, in Dutch:
NYSE/Euronext heeft aangegeven dat de de handel in Turbo's, Sprinters en Speeders mogelijk geheel of gedeeltelijk vanaf 16:00 uur wordt stilgelegd.
Wij houden u via deze belangrijke mededeling op de hoogte van de status.
Why not leverage that 100$ to 1000$ to yourself and then leverage that 1000$ to 10.000$ to yourself and that 10.000$ to 100.000$ to yourself and that 100.000$ to 1000.000$ to yourself and that 1000.000$ to 10.000.000$ to yourself and that 10.000.000$ to 100.000.000$ to yourself and that 100.000.000$ to 1000.000.000$ to yourself and that 1000.000.000$ to 10.000.000.0000$ to yourself, DIG A BIG HOLE, BURRY THAT 10 BILLION, DEFAULT ON THE LOANS AND ASK FOR A BAILOUT?!
AND RETIRE WITH THAT 10.000.000.000$ IN MEXICO!?!
Sounds like a sound business plan to me :)
For me, a liquidity trap would be having money invested in a market so volatile (you know the one I’m talking about) that I might have to sell at a huge loss just when I need the money to eat. That’s why I’ve got three years of my essential living expenses in cash and short term corporate bonds. It may be a high price to pay for some financial security (in long term opportunity cost), but it’s worth every penny. I may change my strategy when Wall Street fund managers start handing out canned goods as a consolation prize to people whose money they lost, but, I don’t see that happening any time soon.
UPDATE
Euronext now says it is a "disturbance". First time ever they are able to tell 5 minutes in advance that a disturbance will take place.
NYSE Euronext says decided to halt the market for Warrants and Certificates at 1600 CET
They say trading will resume at 1710 hours.
Sorry to bother you all, didn't know how to convey this information as quickly as possible
No bother, helped me. Thank you
I have numerous geegaws myself.
blythe needs to get silver back down to JPM stock price-quick.
It still amazes me how people view what's happening as "policy failures".
No western government has any "policy". No Euro government has any "policy". Western governments and Euro governments both do the same thing, borrow and spend. That's not a policy. It's pure ole human selfishness and greed gone wild.
Neither western nor Euro governments have any "policy" regarding their economies and populations. They couldn't care less about their economies and populations. They completely ignore their economies and populations.
It's borrow and spend as much as they can as long as they can.
They don't care about their currencies either. They don't give a rats ass how their wild out-of-control borrowing and spending is steadily debasing their currencies to nothing.
That's why the US dollar is headed for complete collapse. That's why the Euro is headed for complete collapse.
ZHers post all kinds of solutions. And yes the solutions are simple. A child can understand them.
But NONE of the simple straightforward solutions posted here and all over the internet are going to be implemented. Because western and Euro governments DON'T CARE.
BORROWING and SPENDING is ALL they care about.
The biggest cognitive dissonance of all is failing to see, or refusing to see, that governments JUST DON'T FUCKING CARE.
negative feedback loops....deflation kills fiat money every time!!
Just posted at SPIEGEL ONLINE:
Obama's Weakness Is a Problem for the Global Economy.
RELATED:
"The solution is simple: renounce/write down all impaired debt, wipe out the "too big to fail" banks, and restrict the reach and political power of the remaining banks and Wall Street."
The porn video that passed for Washington debt-ceiling talks shows us that any civilized attempt to reach a "simple solution" is doomed to failure- When the question is asked-
"who wants a haircut?" we all want to be Sampson, pre-Delilah.
So, since this is (and i think Tyler is right) the only solution, how is it usually implemented?
Political means? Not on your life- what elected official is going to vote for austerity?
Market? This is inevitable- like a bull elephant, the market is only controlled when it wants to be- as we are seeing now. But when the market decides to give everyone a haircut, everyone starts looking for a scapegoat. Which leads to...
A certain climate of fear and aggression. In a nutshell. this is fascism. Fascism is invariably socialist in nature, and invariably militaristic. There is no institution as inherently socialist as an army. And what do armies do best?
They destroy things- lives, bridges, factories, military equipment, agricultural regions, entire swaths of countryside, whole cities...
So, what does it look like when everyone gets a haircut? Try Dresden, 16 Feb, 1945
Throwing these three policy attempts on Keynes is unfair to Keynes. Awhile back, ZH posted Keynes's letter to FDR confirming Keynes felt even FDR was taking actions Keynes himself had never endorsed. Since Keynes has been dead awhile and had no chance to study today's scenario, whether he would endorse any action is unclear. It was clear that Keynes HATED inflation; that today's European disasters comes from countries breaking a framework of rules Keynes helped set up--rules which don't allow for cheating. How Keynes would deal with the cheaters is not clear.
That the monetary gods efforts have just delayed the days of reckoning seems IMO is a correct set of points.
I agree. Although I am by no means a Keynesian expert, his name has been appropriated to policies that are clearly not his. Regardless of Keynes proposed solutions, I strongly feel that the current financial crises has confirmed the existence of liquidity traps
There is no liquidly trap for 90% of the population. But if you lend $100 billion at zero interest to Lennar and give them tax credits to build more 4000' luxury houses in Phoenix and Las Vegas, you're going to run into demand problem. What you are describing is not Keynesianism but 'trickle down.'
Obuma today:" we need to act like seal team 6 and compramise on the debt"..MR President they died in your war,We as a country are dying with the lack of leadership from you and your socialist cabal.
Seal team six did not compramise with the enemy..how dare you bring them into this economic and political arena.
...vacation in September? sounds good. http://www.youtube.com/watch?v=Hf0Dm-OaTNk&feature=list_related&playnext=1&list=AVGxdCwVVULXf_uNk2W7g8203FC3ygZyhA
OMG - how insightful - NOT!
The Tylers never tire of the CHS peanut gallery posts.
I'm working under the assumption they'll try more of all three....a lot more.
To be fair, many Keynesians also called for a breakup of the big banks and repudation of their debt. What you call Keynesianism they would call neoliberalism.
Agree completely with the article. Beyond that, what burns me is the absolute arrogance of these masters of the universe in using all of us as guinea pigs. The very idea that they can force us into risky assets by screwing us out of savings through inflation and ZIRP is so patently offensive and arrogant that I cannot even elaborate.
Ben Bernanke, I am not your boy toy.
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